Wednesday, February 21, 2007

Color on quarter: Hewlett-Packard (NYSE:HPQ)

Several firms comment on Hewlett-Packard (NYSE:HPQ) after the co issued it's FQ1 results last night:

- Merrill Lynch notes HP reported a beat and raise quarter that supports firm's thesis. They continue to recommend the stock. Revenue upside of 3.3% was driven by PCs and printing, currency, and to a lesser degree, channel inventory build (estimated 2% impact). EPS beat by $0.03. Printer unit growth was 18%. They are raising estimates.

Bears will point to inventory, both in the channel and HP-owned. Higher PC channel inventory weeks are distorted by artificially low sell out right before Vista (denominator depressed); firm estimates the true build was a benign $125mn. Printing channel inventory was up 0.5 weeks YoY (~$300mn), boosting IPG growth by an estimated 5%, a negative. Yet ironically it implies management is very bullish on April Q sell through as inventory is managed on forward basis (measured looking back), suggesting supplies may accelerate following printer units. HP-owned inventory (not channel) is a separate issue and needs work.

CFO was -$22mn and FCF -$601mn, way below net income of +$1.8bn due to bonus, poor working capital metrics, and capex in real estate and IT (to cause LR EPS improvements). ML expects a big snap back in cash flow in April. Maintains Buy.

- Bear Stearns notes that with another qtr of balanced performance and particular strength in PCs/Imaging, HPQ continued to execute on its turnaround (7th straight upside to results/outlook),and the firm sees potential for improvement into FY08 given cost actions and efforts to accelerate growth. They're raising their ests/target and would use aftermarket weakness (concerns on gross mgn pressure, inventory build and weak cash flow which all should be corrected in 2Q07) as a buying opportunity. Bear is raising ests for FY07 from $2.60 to $2.70 (above HPQ's raised guidance for $2.60-$2.65) and for FY08 from $3.05 to $3.15. Tgt goes to $59 from $58. Reits Outperform.

- Baird notes inventory increased 8% sequentially, primarily due to strategic buys, supply chain adjustments, and Vista preparation. Although the firm expects some improvement in inventory management, they believe inventory growth is primarily a reflection of strong growth in PCs/ Printing over the past 18 months and HP's willingness to use balance sheet strength to secure supply/lower cost and thus is not a major concern. Channel inventories remain in-check.

Maintains Outperform Rating. Although investors could be somewhat disappointed that more of the revenue upside didn't flow through to EPS, the firm continues to believe HP remains in the midst of a multi-year turnaround, with at least two-three years of improving operating metrics driving strong EPS growth. With the shares trading at less than 15x their likely conservative C08 EPS estimate and prospects for meaningfully better than 10% EPS growth over the next couple of years, they continue to recommend the stock.

- ThinkEquity's Eric Ross, one of the few remaining bears in HPQ notes the co reported better-than-expected 4QCY06 results yesterday after the close. The company benefited from strong momentum in the IPG and PSG segments as sales of notebooks and printers drove the quarter. HP is guiding April Q sales below normal seasonality. Firm believes HP will face tougher competition going forward as competitors fight to regain market positions in many of its key market segments. They reiterate Sell rating but raise price target from $25 to $30.

While they are impressed by the gains in the PSG segment, as the share gains have come mostly at the expense of Dell. However, they believe most of it has been at the low end. HP has also been able to maintain relatively stable pricing while it gains share. However, in an effort to regain lost market share, they believe Dell and other PC manufacturers will become more price aggressive in coming quarters.

The IPG segment had another solid quarter, benefiting from the strong holiday selling season. Additionally, printer pricing has remained stable. Similar to its PC business, we believe HP will likely face tougher competition ahead as competitors such as Lexmark, and Dell are likely to become more price aggressive in an effort to gain shares in this space.

Notablecalls: Firstly, I think that given the increasingly cautious sentiment around large cap tech names, one can be quite sure everyone will be looking for reasons to sell the likes of HPQ. Will the greater than expected increase in inventory, lower than expected gross margin or the fact that so little of revenue upside actually flowed through to EPS do the trick here? Judging from analyst commentary, I suspect not. Chinks in armor, that's all. Think it will take smth more to stop this train.